October 02, 2013

Health Insurance, Non-Linearity & Income Inequality

Many people who argue about income inequality tend to think about money as if it were something that fell into a normal distribution,, ie bell curve. So they are upset by the very idea that with money, the few have more than the many. So the idea of an 'optimum level of income inequality' represents to them, a bell curve distribution. What they don't recognize is that redistribution of this sort goes against the fundamental way that money is supposed to work.

A simple way to understand is to think of the way that investments and insurances have non-linear payoffs. IE when you model monetary systems like investments and insurance on natural phenomena, you want it to be non-linear because nature is not.

For example. You would not be able to have healthcare insurance cover cancer treatments unless your monetary system can have non-linear payoffs. Which is to say if 1000 people pay $100/year for cancer insurance you use *leverage* based on your estimate that only 2 or 3 of those people will actually get cancer in that year, knowing that cancer treatment costs $20,000. If the 6th person gets cancer in a year, the $20,000 breaks the insurance policy and now that single 1 person destroys cancer insurance for 1000 people. That's the non-linearity of money. There is not a bell curve distribution of insurance benefits. It is the <1% of actual cancer patients who get the huge value of $20,000 payouts for their $100 investment.

If you try to force cancer insurance into a bell curve distribution where everybody gets some payoff, you entirely defeat the purpose of cancer insurance.

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Health Insurance, Non-Linearity & Income Inequality

Many people who argue about income inequality tend to think about money as if it were something that fell into a normal distribution,, ie bell curve. So they are upset by the very idea that with money, the few have more than the many. So the idea of an 'optimum level of income inequality' represents to them, a bell curve distribution. What they don't recognize is that redistribution of this sort goes against the fundamental way that money is supposed to work.

A simple way to understand is to think of the way that investments and insurances have non-linear payoffs. IE when you model monetary systems like investments and insurance on natural phenomena, you want it to be non-linear because nature is not.

For example. You would not be able to have healthcare insurance cover cancer treatments unless your monetary system can have non-linear payoffs. Which is to say if 1000 people pay $100/year for cancer insurance you use *leverage* based on your estimate that only 2 or 3 of those people will actually get cancer in that year, knowing that cancer treatment costs $20,000. If the 6th person gets cancer in a year, the $20,000 breaks the insurance policy and now that single 1 person destroys cancer insurance for 1000 people. That's the non-linearity of money. There is not a bell curve distribution of insurance benefits. It is the <1% of actual cancer patients who get the huge value of $20,000 payouts for their $100 investment.

If you try to force cancer insurance into a bell curve distribution where everybody gets some payoff, you entirely defeat the purpose of cancer insurance.